Who's moving the real estate market?

It comes from John Fitzgerald. A man who manages a mountain of money, and does it very, very well.

What he noticed is that while the property market is booming, we haven’t seen the kind of pick-up in credit that we’d normally expect to see.

Most buyers purchase property with finance, so if there’s a lot of extra buying going on, which there seems to be, you’d expect the finance data to be booming too…

But it isn’t.

It’s an enigma wrapped in a riddle. How do we explain it? Is there something wrong with the data, something that it’s not picking up? (That can often happen.) Or is there a mysterious ‘dark matter’ energy that driving the market into new territory.

Let’s flesh it out. But first, let’s clarify our terms of reference a bit. First of all, and I’ve made this point a few times, we’re not into boom land just yet. The media is making a lot of fuss about the boom, but let’s not get ahead of ourselves.

This is just the first phase in the cyclical upswing. Prices bottomed about a year or so ago, and we’re still building momentum. The boom is coming, but we’re not there just yet.

(Which is a good thing. Now is the time to buy, before the boom matures. This is when the best capital gains are on offer.)

That said, things are very clearly hotting up. Auction clearance rates in Sydney have been up above 80% for 11 weeks in a row (yep, wow!), and prices are certainly on the move.

But so far, we haven’t seen a huge pick up in the credit data. That’s what this chart here shows. It’s the growth rate (year on year change) in the RBA’s credit aggregates.

The light blue line gives you the total. It’s growing at around 3½ percent. That’s not bad.

(Also check out the green line. That gives you personal credit (cars, sofas etc.) That’s back into positive territory. This is encouraging. It looks like the household deleveraging (penny-pinching) might be coming to a natural conclusion…)

But the key metrics for us are the blue and red lines. That’s housing credit for owner-occupiers and investors. Note that both of these are trending upwards. Investors have been holding the fort for a while now, but the recovery in owner-occupier credit gives you a sense for the broad foundation of the current housing recovery.

However, while housing credit is trending upwards, we’re a long way of the boom time days. In the 2009 mini-boom, housing credit growth was giving 10 percent a nudge, and it was even higher than that prior to the GFC.

So there’s a bit of a puzzle here. Prices and activity are certainly running ahead of credit growth. It’s not a huge gap at this stage, but I think you’d have to be expecting credit to make up some ground over the next year or so.

But how do we square off the circle, my dear Watson?

Well, John reckons there’s two new players in the market.

The first is the Self-Managed Super Funds (SMSFs), and I wrote about the impact they were likely to have on the market last week here and here.

The other new player is the Chinese.

As he says, “I look at China and you can take my numbers on SMSF and quadruple them and still not come near the capacity there. John McGrath told me that one of his Sydney auctions in September had 16 registered bidders – all Chinese origin and all cash buyers.”

“The top two house sales in Australia this year were for $52m and $33m, both to the Chinese and both in cash.”

There’s not a lot of great data on foreign purchases, but what there is seems to support John’s thesis.

A NAB report seems to suggest that there’s been a surge in foreign buying, particularly in NSW.

According to NAB, for the three months to September 30, 16 percent of new property was bought by foreigners, up from 11 percent in the previous quarter.

That’s a big increase. And while the overall share remains relatively small, a surge like that in just 3 months would be enough to give a sudden spark to the Sydney market.

Just as we’ve seen.
Queensland has the most foreign interest in its property market, with 20 percent of buyers from overseas. Foreign interest in both states is up quite a lot, up from around 8 precent in 2010.

But no one knows for sure. Foreign investors are allowed to buy newly-built real estate, such as off-the-plan apartments, with no restrictions.

No one is collecting data, and it’s up to folk like NAB to make the best guess they can.

But part of the reason for that is that this is still a very new phenomenon. Chinese buyers were practically unheard of prior to the GFC. Now they are clearly a very serious player.

But my feeling is that this is just the thin edge of the wedge. As I said last time, China is creating 25 billionaires a month, all looking for somewhere solid to preserve wealth.

And my feeling is that Chinese buying isn’t so much about buying for capital gain, or rental return. It’s about getting your money out of China, and turning it into a real asset in a mature, politically stable economy.

They’re playing a very long game.

And after the Chinese, who’ll be next? India, Indonesia, Malaysia?

The world is developing quickly. It gave us the mining boom a decade ago. A property boom just might be next.

Comments

Chinese population 1.4 Billion approximately – enormous economies of scale – more people at the top of the wealth pyramid.But their pollution is high, poor quality control in many things, maintenance of facilities and infrastructure inconsistent. The are improving incrementally and that can be seen.
Travel the world and then come back to Australia where the quality of life is high. So many people worldwide love Australia and want to live here. Malaysian Prime Minister Lee Kuan Yew spouted the White Trash of Asia in criticising Australians. Paul Keating said: “You see, psychologically, Australia must understand it has to live in the region around it. Australia must find its security in Asia; it cannot find its security from Asia.”
Laverda thanks for the reminder.

I think if that’s the case then the Government should step in and stop all this under the radar foreign investment that will make it harder for our kids to get a home of their own. We are being treated as 2nd class citizens in our own country all for the mighty dollar.

Sorry Delwyn but you where coming across as another one of those who complain but don’t do.
I don’t judge as I don’t know. I can only go on what I read. you said that you were concerned about your kids not being able to buy property in the future but if you are already buying then the future of your children and others is within your teachings.

Yep, same thing happened in Hawaii many years ago. The Japanese bought all the beachfront property and in some areas they owned so much that they fenced off the beaches. The natives weren’t allowed on their own country’s beaches.

Chinese-cash buyers! I know about $200million drug bust with chinese fugitives. This is perfect way for criminals to legalise they cash-buy a property, maybe in Australia too. It is look the way that future australian generations are going to be tenants of chinese landlords. A bit sour that boom sounds(

Marat, Racial prejudice is the only thing that smells a bit sour here, mate. But before you whinge too much, where did you get your name from. China has done Australia no harm, but plenty of good. Ken.

I would like to know the areas in which the overseas buyers are active. I imagine in the CBD or close. I imagine that these are the areas of steepest growth when prices rise. Also a guy we met builds and sells predominately off the plan in new developments and most of his buyers are mature age people down-sizing. He is doing good business.

It’s a shame that the Chinese people probably have better data on where they are actively investing in and creating mini booms on real estate than we have. Australia needs to get with the program and start collating this information so we can take advantage as Australians.

I feel as Australians we need to tax foreign investors at the point of sale at a higher rate than Aussie citizens, this money could then be utilised as an infrastructure tax providing increased benefits for Australians. Additionally another rule could be put in place that the Foreign investor be made to buy property one for one in a regional town and then a capital city, stimulating population outside of our overcrowded cities and helping our struggling farmers and rural communities as well as making more affordable housing in regional satellite cities.

Personally I would like to see 4-5 bedroom apartments, with Eco friendly parklands , awesome sporting facilities and good community living explored, rather than using up all our good land on single dwelling houses, for our capital cities. Its a far better utilisation of land and will deliver better cheaper housing options whilst still allowing people the dream of a home instead of a small flat.

Hi…Can anyone confirm or give facts as to whether we (Australians) are allowed to purchase property in China? Many Asian countries only allow “foreigners” to lease property for (say) 99 years, then it reverts back to local Government ownership…seems a good way of getting growth and still have the ability to hold assets for the benefit of future generations?
Our grand kids one day will wonder what their previous generations were thinking just to sell off Australia to the highest bidders!
Thanks…Mike S

I do wonder why you think personal debt is the natural conclusion to deleveraging? I think it is entirely possible that people are smelling a rat and not taking up credit for items that show no return, like couches, cars and TV’s and are feeling liberated with the experience they have had with saving.

It is even possible that people are beginning to see real estate as something that doesn’t produce a return without capital growth and the capital growth will only come from increased borrowing, unless you are right about all those SMSF funds piling in.

I have no axe to grind with real estate, i am currently involved in a 200 lot res development in Melbourne, own Commercial property in Adelaide and have a business that provides consumer credit.

Just an opinion based on a feeling I am getting with my experiences. I certainly would not make a real estate investment today based on expected capital growth.

Jon, thanks for the answer to the second half of my original question, about the impact of SMSFs and Asian money on the current market.
It is a pity that the Government Statistics boffins are not keeping these records for determining the Government’s priorities in infrastructure spending and control of our national character and social assets.
The influence of people like your honourable self and Dymphna, together with Mark Rolton and Rick Otton, to name a few, must be changing the overall demographics of property ownership. The Great Australian Dream of the quarter acre block is dead. Youngsters are choosing to rent flats because they have to keep up with the Joneses, driving a flash SUV, rather than knuckling down to living frugally and starting small. The few who have good mentors will end up as the self-made billionaires of their generation. The rest will still be renting a flat. In the meanwhile, more and bigger portfolios are being built by older folks who are becoming aware and concerned enough to educate themselves.

I don’t think the strong real estate market as of late can be attributed solely to Chinese buyers. There has always been Chinese buyers and yes they have a reputation for paying excess. This in part may be due to growth in China but also culturally Chinese people live together and often buy real estate in numbers that help with loan repayments. They also have a tendency to buy in specific suburbs and close to infrastructure and amenities.

In my opinion the real driver of the market at the moment is low interest rates along with government grants for home buyers. At present there are more buyers in the market than sellers and prices are going crazy. It will be interesting to see what happens when rates eventually return to more normal levels. I think allot of the people buying in this heated market are going to struggle when this happens. Lets not forget that there’s uncertainty in the global economy and america and Europe is in financial strife. No one knows how Aussie banks will be impacted when the US crashes again in the very near future. Will Abbott implement a stimulus package? I’m active in all property markets but my strategy in this market would be to buy, develop and sell quickly. I wouldn’t buy and hold right now as market is extremely unpredictable. If you purchasing a home then I would suggest not to borrower more than 80% and makesure you can service a few rate rises and then brace yourself.

True Keith, but as I understand, the Government has eased the regulations for overseas investors who buy new property. This, together with the enormous boom in Chinese Billionairism, is fueling a substantial increase in interest here, for the reasons Jon explained.